<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NO. 0-23686
PC SERVICE SOURCE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1703687
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
2350 Valley View Lane
Dallas, Texas 75234
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 406-8583
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE 5,746,820
(Title of class) (Number of Shares Outstanding
as of March 19, 1997)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant is approximately $27,800,000. This amount was calculated by
reducing the total number of shares of the registrant's common stock
outstanding by the total number of shares of common stock held by officers,
directors, and stockholders owning in excess of 10% of the registrant's common
stock, and multiplying the remainder by the average of the bid and asked price
for the registrant's common stock on March 19, 1997, as reported on the
National Association of Securities Dealers, Inc. Automated Quotation System.
The information provided shall in no way be construed as an admission that any
officer, director, or more than 10% stockholder of the registrant may be deemed
an affiliate of the registrant or that such person is the beneficial owner of
the shares reported as being held by such person, and any such inference is
hereby disclaimed.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement concerning the
1997 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A are
incorporated by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS.
GENERAL
PC Service Source, Inc. ("PCSS" or the "Company") is the leading
provider of logistics services to the PC hardware repair industry. These
logistics services include sourcing and distributing spare parts, inventory
management, warranty claims processing, parts remanufacturing and related
functions. PCSS is the largest independent distributor of parts used in the
repair of Personal Computers ("PC") in North America, distributing over 150,000
different parts to approximately 20,000 PC service providers ("Service
Providers") such as independent service organizations, original equipment
manufacturers' service operations, and PC resellers. Service Providers
purchase replacement parts for the service and repair of PCs and peripherals.
These parts may be purchased directly from the Original Equipment Manufacturer
("OEM") or from any of the hundreds of independent distributors, the largest of
which is PCSS. The Company currently maintains in its inventory over 22,000
different parts. These parts include printer parts, logic boards, controllers,
disk drives, monitors, memory boards, cables and related hardware. PCSS has
established vendor relationships for repair parts with over 30 leading OEMs,
including AST, Canon, Compaq, Exabyte, Hewlett Packard, IBM, Lexmark, NEC,
Packard Bell and Toshiba. To complement its distribution operations, PCSS
seeks to supply additional value-added services to OEMs to allow OEMs to
completely outsource their service logistics functions.
The foundation of the Company's logistics services is its ability to
provide accurate, efficient and rapid delivery of repair parts to its
customers. PCSS also offers value-added logistics services to Service
Providers and OEMs to meet their particular needs.
PCSS offers a wide range of logistics services to Service Providers.
These logistics services include inventory management, parts sales and
sourcing, warranty claims administration, exchanged parts remanufacturing
administration, vendor returns, management reporting, and inventory liquidation
and consignment. See "Business -- Services."
PCSS has leveraged its logistics services capabilities and strong
vendor relationships to establish outsourcing arrangements with OEMs. Under
the terms of an OEM outsourcing arrangement, the OEM may direct authorized
service providers, customers and dealers to the Company for some or all of the
OEM's warranty and non-warranty parts business. See "Business -- Services."
PCSS believes an important factor in an OEM's decision to outsource
service logistics functions is the extent to which such an arrangement relieves
the OEM of functions outside of the OEM's core competencies. These service and
warranty logistics areas often include remanufacturing activities. To support
this function and encourage OEM's to consider outsourcing functions to PCSS,
the Company commenced its own remanufacturing operations through Cyclix
Engineering Corporation ("Cyclix") during 1995. The principal business
objective of Cyclix is to outsource the remanufacturing and component level
repair operations of OEMs. PCSS believes its remanufacturing capabilities
through Cyclix are an important
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aspect of the full range of value-added services it offers to OEMs in an effort
to outsource a broader array of the OEM's service and warranty logistics
functions.
OPERATIONS
PCSS conducts its parts distribution and processing business
principally from its 155,200 square foot distribution center at the Alliance
Airport facility located in the Dallas/Fort Worth Metroplex. Recognizing the
immediate demands of its services customers, PCSS established an automated and
integrated order processing and distribution system which allows the Company to
provide efficient and accurate delivery of products on a next day basis. The
Company has also established a system of "work cells" for receiving, recording
and warehousing daily supply shipments. All parts are bar coded and tracked
throughout the 155,200 square foot facility through radio frequency scanning
equipment that is integrated with the Company's computer network. Parts are
received daily from OEMs and other suppliers, bar coded and shelved in the
Company's warehouse for quick access based on real time daily demand.
In addition, many PCs and peripheral replacement parts are
remanufactured from returned goods in need of repair. For example, a part may
no longer work because one of its many components is defective. When a Service
Provider purchases a replacement for a defective part, the defective part
("core") may often be returned for credit. The core may then be repaired and
resold as a remanufactured part. Service Providers often prefer lower cost
remanufactured parts because they have performance specifications equivalent to
newly manufactured parts. This aspect of the PC parts business requires that
the Company distribute new or remanufactured parts to its customers, collect
broken but repairable parts, and then administer the remanufacturing of those
parts for resale. Therefore, unlike many distribution businesses, products
flow to and from the Company and its customers, and to and from its suppliers.
In addition to new parts being received and shelved daily, cores are also
received daily from customers, sorted, and distributed to the Company's
remanufacturing subcontractors, including Cyclix. Following the
remanufacturing of a core, it is bar coded and replaced in inventory.
Service Providers can make purchases 24 hours a day, 365 days a
year by credit card, cash on delivery, or, for approved accounts, by
open account. Service Providers may also place orders directly over the
Internet through PC ServiceNet(SM). PC ServiceNet, located on the Internet
at http://www.pcservice.com/parts.htm, provides customers with an Internet
web-based real-time purchasing and ordering system, which enables customers to
place an order electronically, check parts availability and pricing, and the
status of pending orders. Because many of the Company's customers are familiar
with and have ready access to the Internet, the Company plans to expand its
Internet customer service functions to include additional features, such as
warranty processing programs.
Service Providers typically call an account representative, toll free
(1.800.PCParts) to place orders for next day delivery. Utilizing its high
capacity Computer Telephony Integrated ("CTI") system, the Company's call
center automatically routes customer calls to the appropriate account
representative. Each account representative has a work station that provides
access to the Company's information system, through which the account
representative may retrieve detailed information about accounts, products,
inventory, shipping, and the status of all orders. Through the information
system's imaging and direct fax capabilities,
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the account representative may access exploded-view diagrams of a substantial
majority of parts in inventory from the account representative's work station
and fax the image to the Service Provider to confirm the identification of the
ordered part. Once the order is placed, the account representative immediately
transmits the order to the distribution center where the part is picked, packed
and shipped in accordance with the Service Provider's request, usually the same
day the order is placed.
SERVICES
The Company offers a wide range of value-added logistics services to
Service Providers and OEMs. These services capabilities in combination with
the Company's core distribution expertise effectively allow PCSS to become the
spare parts department for its customers. PCSS offers these logistics services
in two formats, Service Provider alliances and OEM outsourcing arrangements,
each based on the demands of its customers. In 1996, Service Provider
alliances and OEM outsourcing arrangements generated 15% and 13% of the
Company's total revenues, respectively.
Service Provider Alliances. Typically, a substantial portion of a
Service Provider's cost structure is attributable to parts inventory ownership
and logistics management for these materials. The Company offers a range of
services directed at minimizing this cost burden of the Service Provider.
These support services include inventory management, parts sourcing, warranty
claims administration, vendor returns, management reporting and inventory
liquidation and consignment. Because this type of support generally requires a
high level of process integration between the Service Provider and the Company,
the Company seeks to provide these services through long term alliances. Under
these arrangements, the Company becomes the primary source of specified parts
for the Service Provider. The Service Provider benefits from this alliance
with the Company because these value-added services decrease the Service
Provider's inventory carrying costs, improve service, and permit the Service
Provider to devote less of its capital to these business functions.
The Company has entered into service provider alliances with
Ameridata, CompUSA, Xerox and XLConnect. Generally, these types of
arrangements may be terminated by either party at any time, but the Company
enters into Service Provider alliances with the expectation that these
arrangements will lead to long-term relationships or contracts with those
parties.
OEM Logistics Outsourcing. PCSS seeks arrangements with OEMs of PCs
and peripherals to handle a defined portion of the related parts distribution
and warranty processing functions. Under the terms of such an OEM outsourcing
arrangement, the OEM directs some or all of its customers and dealers to the
Company for some or all of the OEM's warranty and non-warranty parts business.
PCSS believes these arrangements benefit OEMs by reducing infrastructure needs,
reducing the amount of capital committed by the OEM to the non-core segments of
its business, and improving customer service and responsiveness. The Company
believes that as a specialist in managing the key business functions associated
with parts distribution, which includes its expertise in two-way distribution
logistics, the Company is able to provide parts and related logistics services
at lower costs and greater reliability than manufacturers themselves can
provide such services.
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In 1994, the Company entered into arrangements with Compaq to provide
warranty administration processing for a portion of Compaq's network of
value-added resellers and national dealers. In January 1996, the Company and
Compaq expanded an arrangement pursuant to which all calls received by Compaq
for non-warranty replacement parts from non- authorized Service Providers and
end users are routed via a dedicated T-1 line directly to the Company's call
center for handling and order processing. The Company has also entered into an
arrangement with AST to supply spare parts order fulfillment services for all
AST non-warranty service parts. Other OEMs with which the Company entered into
arrangements for handling limited functions for the OEM include Exabyte, NEC
and Packard Bell. These arrangements may be terminated by either party at any
time, but the Company has entered into them with the expectation that these
arrangements will lead to long-term relationships or contracts with these
parties.
Remanufacturing. In July 1995, PCSS established Cyclix, a provider of
parts remanufacturing outsourcing services, to further enhance the broad array
of logistics services offered by the Company to its OEM customers. PCSS
believes that its remanufacturing capabilities through Cyclix are an important
aspect of the full range of value-added services it offers to OEMs in an effort
to outsource larger functions of the OEM's service and warranty logistics
functions. Remanufacturing involves the component level repair of defective
parts (cores) returned for exchange credit by Service Providers, as well as
upgrading the parts to the most recent technical specification set by the OEM.
Cyclix has entered into remanufacturing arrangements with AST and Compaq for
the repair of main logic boards. Cyclix also remanufactures personal computer
equipment for large corporate end users. These arrangements may be terminated
by either party at any time, but the Company enters into them with the
expectation that these arrangements will lead to long-term relationships or
contracts with those parties.
MANAGEMENT INFORMATION SYSTEMS
The Company maintains sophisticated information systems to improve
efficiency, process orders, monitor operations, manage inventory risks, offer
faster and higher levels of service, and provide innovative service logistics
to OEMs and Service Providers. These on-line systems provide management with
information concerning sales, inventory levels, customer payments and other
operations which are essential for the Company to operate efficiently and to
enable it to offer additional services. The Company has invested in advanced
telecommunications, voice response equipment, electronic mail and messaging,
automated fax technology, radio frequency scanning and bar-coding and automated
inventory management.
The Company maintains a sophisticated call center utilizing an Aspect
switch, which is integrated with the Company's information system. The
information system is a Unix server based Hewlett Packard 9000 T-500 running an
Informix database program customized to the Company's requirements. The CTI
system is an essential element of the call center's operation, automatically
routing customer calls to the appropriate account representative and monitoring
information which is used by management to improve efficiency and customer
services. The Company compiles and analyzes data on, among other things, the
amount of time a customer waits until the customer's call is answered, the
accuracy of information conveyed by account representatives, the number of
sales lost due to unavailability of parts, inventory levels, as well as the
status of any particular shipment. During 1996, the call center handled almost
2,000,000 calls, allowing PCSS to ship approximately 750,000 packages. Each
account representative has a work station that
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provides access to the Company's information system, through which the account
representative may retrieve detailed information about customers, products,
inventory, shipping, and the status of all orders. Through the information
system's imaging and direct fax capabilities, the account representative may
access exploded-view diagrams of a substantial majority of parts in inventory
from the account representative's work station and fax the image to the
customer to confirm the identification of the ordered part.
PCSS has also developed capabilities which allow pre-approved
customers to place orders electronically, reducing the order processing costs
for both the Company and the customer. The Company believes that this
capability will increasingly become required by many customers and some
suppliers and, accordingly, the Company will continue to invest in enhancing
those capabilities.
SALES AND MARKETING
The Company views service spare parts distribution as a value-added
service business. As such, sustaining the growth of the Company is dependent
upon building and maintaining relationships and loyalties with service
providers as well as OEMs. The Company maintains a Service Provider sales
force. Each field sales representative is located in a major metropolitan area
and works as a team with inside sales representatives to cover a designated
geographical territory. Major account managers are assigned to maintain
relationships with the Company's largest national accounts and are assigned
territories based on the customers' market segment. The Company also has a
separate sales force focusing on OEM outsourcing arrangements. The Company's
sales representatives visit major OEMs, Service Providers and attend various
trade shows.
The Company regularly advertises its parts and services in recognized
trade magazines, publishes a bi-monthly customer newsletter, a quarterly product
catalogue, and makes direct mailings to potential customers. Customers rely
upon the Company's product catalogs, newsletter, and frequent mailings as a
source for product information, including prices. In addition, the Company
maintains a presence on the world-wide web at http://www.pcservice.com. The
Company has applied for registration of its PC SERVICESOURCE(sm), its RIGHT
PARTS RIGHT NOW(sm) and its PC SERVICE NET(sm) marks and related design service
marks. The Company also conducts customer satisfaction surveys and purchases
market research data to maintain continuous insight into marketplace trends and
requirements.
The Company provides comprehensive training to its sales and account
representatives regarding technical characteristics of products and the
Company's policies and procedures. Each new account representative attends a
four- week course given by the Company. In addition, the Company's ongoing
training program for sales and account representatives is supplemented by
product seminars offered by OEMs.
CUSTOMERS AND SUPPLIERS
PCSS sells parts to customers throughout the United States, Canada,
and in Latin America, as well as in other countries. In 1996, international
sales accounted for approximately 7% of the Company's net revenues. In 1996,
no customer of the Company accounted individually for more than 10% of the
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Company's net revenues. The Company sells a variety of parts to approximately
20,000 Service Providers, including Ameridata, Decision One, IBM (MVAS), Tandy
Services and Vanstar. In addition, the Company has entered into Service
Provider alliances with Ameridata, CompUSA, Xerox and XLConnect. PCSS also
entered into outsourcing arrangements with OEMs, such as AST, Compaq, Exabyte,
NEC and Packard Bell to outsource various service logistics functions. See
"Business -- Services." These arrangements with Service Providers and OEMs may
generally be terminated by either party at any time, but the Company has
entered into them with the expectation that these arrangements will lead to
long-term relationships or contracts with these parties. In fiscal 1996, the
Company also sold parts to CompuCom Systems, Inc. ("CompuCom") the owner of
more than 5% of the Company's common stock prior to the Company's secondary
offering of its common stock on June 6, 1996, on the same terms as sales to
independent parties. See Footnote 8 to Consolidated Financial Statements. In
connection with the secondary offering, CompuCom sold 750,000 shares of the
Company's common stock and, accordingly, no longer owns more than 5% of the
Company's common stock.
The Company depends on numerous suppliers (including 30 leading OEMs)
to provide the Company with the parts it sells. During 1996, the sale of Canon,
Hewlett Packard and Compaq parts accounted for approximately 18%, 13% and 11%,
respectively, of the Company's total net revenues. No other supplier provided
parts accounting for more than 10% of the Company's net revenues. In fiscal
1996, the Company also purchased parts from CompuCom on the same terms as
purchases from independent parties. See Footnote 8 to Consolidated Financial
Statements. There are generally no long-term supply agreements governing the
Company's relationships with its major suppliers. The Company's primary supply
arrangements are thus subject to termination or curtailment at any time, with
little or no advance notice. Although management expects no such loss to
occur, the refusal or inability of any major manufacturer to ship to the
Company, or an increase in prices charged to the Company as compared to the
prices charged by such manufacturers to Service Providers, could have a
material adverse effect on the Company.
COMPETITION
The Company is the leading provider of logistics services to the PC
repair and maintenance industry. These logistics services include distribution
and sourcing of spare parts, inventory management, warranty claims, parts
remanufacturing and related functions. Management believes that the Company
is the largest independent distributor of parts used in the repair of PCs in
North America, distributing over 150,000 (of which it maintains over 22,000 in
its inventory) different parts for PCs to approximately 20,000 service and
maintenance providers.
The market for the Company's products is large but fragmented.
Competition in the industry is widespread and comes from other independent
distributors (including various small independents) that are not affiliated
with an OEM, as well as from the OEMs themselves. When OEMs act as
distributors, they typically distribute only their own products. Independent
distributors typically distribute a variety of manufacturers' parts. Among the
Company's major independent competitors are Aurora Electronics and The Cerplex
Group. Certain of these competitors, such as the OEMs, are large and have
substantially greater financial and other resources than the Company.
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The Company believes that its growth is attributable to its ability to
consistently process customer orders and supply needed parts on demand, with
rapid delivery, and at competitive prices. Management believes that these
competitive factors will continue to govern customer decisions in the
foreseeable future.
EMPLOYEES
As of March 1, 1997, the Company had 545 full time employees, of which
133 were in the call center, 124 were in administration, 61 were in sales, 153
were warehouse services, and 74 were engineers or technicians. The Company is
not party to any collective bargaining agreement and believes relations with
its employees are good.
GOVERNMENT REGULATION
The Company is subject to various federal, state, and local laws and
regulations relating to worker safety and health, environmental regulations,
and other matters applicable to businesses in general. The Company does not
believe that these regulations as currently in effect have a material effect on
its business.
ITEM 2. PROPERTIES
All of the Company's properties are located within the Dallas/Fort
Worth Metroplex area. In February 1995, the Company entered into a 10-year
office lease that commenced on June 1, 1995, for 63,500 square feet in Dallas,
Texas. This leased space houses the Company's corporate offices, account
representatives, and information systems. The Company has the option to
terminate the lease during the fifth year of the lease and the option to renew
the lease for an additional 5-year term. In March 1997, the Company entered
into an amendment to this lease to provide the Company with an additional
18,750 square feet of office space.
In May 1995, the Company entered into a 10-year build-to-suit lease
that commenced on December 18, 1995, for a 155,200 square foot distribution
center near the Alliance Airport, out of which orders are received, processed
and shipped. The Company has a build-to-suit lease option for an additional
100,000 square feet at that location.
During 1995, the Company also entered into a 3-year lease that
commenced on March 1, 1995, for a 51,500 square foot facility in Dallas, Texas
to be used for the remanufacturing operations of Cyclix. The Company has the
option to renew the lease for an additional 3-year term.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the Nasdaq National Market
("Nasdaq") under the symbol "PCSS."
For the periods indicated below, the following table sets forth the
high and low closing prices of the Company's common stock as reported on
Nasdaq, rounded to the nearest eighth of a dollar.
<TABLE>
<CAPTION>
FISCAL 1996 HIGH LOW
----------- ---- ---
<S> <C> <C>
January 1-March 31 . . . . . . . . . . . $10 1/4 $8 1/4
April 1-June 30 . . . . . . . . . . . . . 16 3/4 9 3/4
July 1-Sept.30 . . . . . . . . . . . . . 15 1/4 7 5/8
Oct. 1-Dec. 31 . . . . . . . . . . . . . 9 1/2 5 1/2
</TABLE>
As of March 19, 1997, there were 109 record holders of the Company's
common stock. The Company estimates that there were approximately 2800
beneficial owners of its common stock as of the same date. The Company has not
declared or paid any cash dividends on the common stock since its organization.
Under the terms of the Company's revolving bank line of credit, the Company's
ability to pay cash dividends to its stockholders is restricted.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial information regarding the Company's
financial position and operating results for the five-year period ended
December 31, 1996, are derived from the audited consolidated financial
statements of the Company. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes
included elsewhere in this report.
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
OPERATING RESULTS: YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995(1) 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues ......................................... $110,146 68,690 42,267 24,110 9,797
Cost of revenues ..................................... 78,001 49,766 30,171 17,592 6,969
-------- -------- -------- -------- --------
Gross margin ...................................... 32,145 18,924 12,096 6,518 2,828
Operating Expenses:
Selling, general and administrative ............... 26,457 17,241 8,746 4,656 2,320
Loss incurred from terminated supply
agreement ......................................... -- 1,935 -- -- --
Depreciation and amortization ..................... 2,151 1,510 384 138 41
-------- -------- -------- -------- --------
Total operating expenses .................... 28,608 20,686 9,130 4,794 2,361
-------- -------- -------- -------- --------
Earnings (loss) from operations ................... 3,537 (1,762) 2,966 1,724 467
Net interest expense (income) ........................ 577 473 (115) 177 121
-------- -------- -------- -------- --------
Earnings (loss) before income taxes ............... 2,960 (2,235) 3,081 1,547 346
Income tax expense (benefit) ......................... 1,089 (730) 1,186 587 128
-------- -------- -------- -------- --------
Net earnings (loss) .............................. 1,871 (1,505) 1,895 960 218
======== ======== ======== ======== ========
Earnings (loss) per common share ..................... $ .35 $ (.39) $ .46 $ .30 $ .09
Weighted average common shares outstanding ........... 5,285 3,900(2) 4,103 3,373 3,367
======== ======== ======== ======== ========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital ......................................... 23,494 15,310 10,702 4,164 1,935
Total assets ............................................ 50,174 33,127 20,015 7,567 3,492
Long-term debt, excluding convertible debt(3) ........... 3,059 10,165 873 1,610 --
Stockholders' equity, including convertible debt ........ 32,196 11,603 13,081 3,312 2,119
</TABLE>
- ----------------
(1) 1995 results include a non-recurring, pre-tax charge of $1.9 million
related to the supply agreement with Intelogic Trace, Inc. ("Intelogic")
which was terminated in connection with the bankruptcy of Intelogic. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(2) Common Stock equivalents are not included as exercise of options and
warrants would be anti-dilutive.
(3) CompuCom held $1.5 million of convertible debt in the Company during 1993
and 1992. In January 1994, CompuCom converted that debt into 2,000,000
shares of Common Stock. See "Certain Transactions."
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL OVERVIEW
As part of the Company's efforts to broaden its service logistics
capabilities and to accommodate its continued growth, the Company has made
significant investments in its facilities, information systems and personnel.
In January 1996, the Company relocated its distribution operations to a 155,200
square foot automated distribution facility near the Alliance Airport located
in the Dallas/Fort Worth Metroplex. In addition, the Company has installed a
sophisticated computer network and integrated telephone system to automate and
streamline the Company's inventory, ordering and distribution process. The
Company has also made numerous additions to its management team and
substantially increased the number of, and training provided to, its sales
representatives. During the fourth quarter of 1996 and first quarter of 1997,
the Company added a chief financial officer, a vice president to manage the
Company's information systems and a vice president to manage its call center
operations.
The Company continues to believe that its remanufacturing capabilities
through Cyclix are an important aspect of the full range of value-added
services which it offers to OEMs. Cyclix's revenue grew from $634,000 in 1995
to $2,215,000 in 1996, but it was not yet profitable, as management had hoped.
Cyclix's loss was $306,000 in 1995, compared to a loss of $223,000 in 1996.
Typical of similar remanufacturing operations, Cyclix's financial operating
model results in higher gross margins and higher operating costs than the
Company's distribution operations. As the remanufacturing operation grows as a
percentage of the Company's overall business mix, this different operating
model will have an increasing impact on the Company's consolidated income
statement and operating margins.
The Company recorded net earnings of $1,871,000, or $.35 per share for the
year ended December 31, 1996 compared with a net loss of $1,505,000, or $.39
per share for the same period in 1995. Management continues to pursue its goal
of making PCSS the distribution hub between OEMs and Service Providers by
expanding its OEM outsourcing arrangements and capacity. Although no
assurances can be given, the Company believes that expansions in OEM
arrangements will increase the Company's net revenues and earnings.
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RESULTS OF OPERATIONS
The following table displays the Company's statements of operations as a
percentage of net revenues for the three years ended December 31, 1996.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 70.8 72.5 71.4
------ ------ ------
Gross margin 29.2 27.5 28.6
------ ------ ------
Operating expenses:
Selling, general and administrative 24.0 25.1 20.7
Loss incurred from terminated
supply agreement -- 2.8 --
Depreciation and amortization 2.0 2.2 .9
------ ------ ------
26.0 30.1 21.6
------ ------ ------
Earnings (loss) from operations 3.2 (2.6) 7.0
Net interest expense (income) .5 .7 (.3)
------ ------ ------
Earnings (loss) before income taxes 2.7 3.3 7.3
Income taxes (benefit) 1.0 (1.1) 2.8
------ ------ ------
Net earnings (loss) 1.7 (2.2%) 4.5%
====== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Net revenues for the year ended December 31, 1996 of $110.1 million
represent an increase of $41.5 million, or 60% over the year ended December 31,
1995. The Company's outsourcing agreement with Intelogic contributed $3.1
million in net revenues during 1995 and that agreement was terminated in April
1995 in connection with the bankruptcy and liquidation of Intelogic. Excluding
sales to Intelogic for the 1995 period, revenues increased by $44.6 million, or
68%. The primary components of revenue are the general parts distribution
operations, service provider alliances and OEM outsourcing arrangements, which
represented 63%, 15%, and 13% of the yearly revenues, respectively.
The gross margin percentage increased in 1996 to 29.2% from 27.5% in 1995.
Because the gross margin is different for each line of computer spare parts
which the Company sells, changes in the mix of parts sold by the Company during
a particular period affect the Company's gross margin. The increase in gross
margin experienced in 1996 was a result of favorable variations in the mix of
parts sold during the year, as well as improved margins for parts sold on
exchange, improvements in pricing and purchasing, and the fact that Cyclix had
slightly higher margins than the remainder of the Company's business.
11
<PAGE> 13
Selling, general and administrative expenses ("SG&A") as a percentage of
net revenue decreased from 27.9% in 1995 to 24% in 1996. The primary reason for
this decrease in 1995 was that the Company incurred a significant charge (2.8%
of revenues) in connection with the termination of the Company's outsourcing
agreement with Intelogic and the bankruptcy and liquidation of Intelogic, with
no related Intelogic revenues in the last three quarters of 1995.
Depreciation and amortization decreased as a percentage of net revenues to
2% for the year ended December 31, 1996 compared to 2.2% in 1995 despite a
$641,000 increase in depreciation and amortization expense. The increase in
expense was due to depreciation on capital expenditures made over 1996 related
to the Company's information systems, new distribution facility, and new
corporate headquarters.
Interest expense (net) decreased slightly as a percentage of net revenues
to .5% in 1996 compared to .7% in the year ended December 31, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Net revenues for the year ended December 31, 1995, totaled $68.7 million,
an increase of $26.4 million, or 63% from fiscal 1994. During 1995 Intelogic
accounted for $3.1 million in revenues and during 1994 Intelogic accounted for
$1.1 million in revenues; as discussed below, the Intelogic supply agreement
was terminated in connection with Intelogic's bankruptcy filing. The Company's
revenues grew by 59% if Intelogic is excluded from the calculation. The
primary components of revenue are the general parts distribution operations,
service provider alliances and OEM outsourcing arrangements, which represented
68%, 14%, and 10% of the yearly revenues, respectively.
The gross margin percentage decreased during 1995 compared to 1994
primarily due to changes in the mix of parts sold during 1995 compared to 1994.
Because the gross margin is different on each computer spare part which the
Company regularly keeps in inventory, changes in the mix of parts sold by the
Company during a particular period effect the Company's gross margin. In
addition, the approximate number of parts stocked by the Company increased to
over 15,000 in 1995, from 8,000 in 1994.
SG&A as a percentage of net revenues increased substantially during 1995
compared to 1994. The increase in SG&A was principally the result of major
increases in three areas: (1) compensation/severance, (2) Intelogic losses, and
(3) increases in occupancy expenses.
Compensation increased significantly during 1995 compared to 1994 because
of an increase in the number of employees; headcount rose to 327 by 1995
year-end compared to 185 at 1994 year-end. This increase is in addition to the
approximately 45 persons terminated during the year as a result of the closure
of the component level returned parts repair facility in San Antonio, Texas
(the "San Antonio Facility") which was acquired by the Company from Intelogic.
The increases in personnel were necessary to support increased revenue growth,
but because training was necessary for many of the Company's new employees,
salary expense was incurred in advance of improvements to revenues as a result
of new personnel. This was also true at Cyclix which began operations in July
1995 and, as expected, did not generate sufficient revenue to cover its
expenses during 1995. Compensation expense also increased as a result of
$243,000 in severance
12
<PAGE> 14
payments made to terminated members of management at the Company's corporate
headquarters and employees formerly employed at the now closed San Antonio
facility.
In November 1994 the Company entered into a supply agreement with Intelogic
to provide substantially all of the spare parts and replacement parts required
by Intelogic's service operations to its customers. In addition to agreeing to
supply parts to Intelogic, the Company acquired the San Antonio Facility,
certain parts inventory, and repair equipment. Intelogic filed for bankruptcy
less than 4 months later in March 1995 and its business was sold in April 1995.
Following the sale of Intelogic, the supply agreement with the Company was
terminated. As a result, the Company determined to close the San Antonio
Facility and terminated the employment of approximately 45 employees at that
facility. The bankruptcy filing of Intelogic resulted in a pre-tax charge to
the Company in 1995 of $1,935,000, of which $907,000 was for uncollected
receivables in excess of the approximately $900,000 recovered by the Company
from its escrow-security account with Intelogic, and $931,000 related to the
write-off of certain fixed assets formerly used at the San Antonio Facility.
The balance of the pre-tax charge is represented by the severance payments made
to terminated employees at the San Antonio Facility. The reserves and charges
relating to Intelogic by quarter were as follows. The Company reserved
$245,000 against the Intelogic receivables during the first quarter, $316,000
during the second quarter, and recognized a charge of $1,271,000 in the third
quarter relating to uncollected receivables ($340,000) and the write-off of
fixed assets ($931,000) formerly used at the closed San Antonio facility.
In addition, but to a lesser extent, the Company's occupancy expenses
increased as a result of the opening of Cyclix, the 6 months of rent in the
closed San Antonio Facility, and the movement of the Company's management
office's into its new headquarters. The Company had no remaining lease
obligations on the closed San Antonio Facility nor on its former corporate
offices, and as of the 1st quarter of 1996 the Company has relocated its
distribution facility and will have no remaining rental obligations on its
former distribution facility.
Depreciation and amortization increased as a result of capital expenditures
made to the Company's information system, phone system, and capital
expenditures relating to the relocation of the Company's headquarters and
relocation of the Company's distribution facility which was relocated in
January 1996, but which was substantially complete in 1995. Furniture and
equipment expenditures also increased with the Company's increase in headcount.
Increases in working capital required to support the increase in the
Company's sales resulted in the Company becoming a net borrower of cash under
its revolving line of credit. Therefore, the Company had interest expense of
$473,000 during 1995 as opposed to interest income of $115,000 during 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently maintains a revolving bank line of credit which
provides for borrowings of up to a maximum of $16 million, based on a borrowing
base of qualified inventory and eligible receivables. The borrowing base,
which is adjusted weekly, was $15 million at December 31, 1996. The Company's
available borrowing capacity at December 31, 1996, was approximately $12
million. The line is collateralized by substantially all of the assets of the
Company and matures in December 1997. Further, the
13
<PAGE> 15
Company currently has financing agreements in place for 1997 that allow for the
acquisition of $2.0 million of capital assets through leasing arrangements.
The Company has historically been a net user of cash from operations, and
has financed its working capital requirements and its capital expenditures from
revolving credit, subordinated debt, equity financing and internally generated
funds. Cash used in operating activities during the year ended December 31,
1996 was $4.3 million compared with $5.4 million in 1995. The decrease in cash
used in operating activities resulted largely from net earnings experienced in
1996 and changes in working capital requirements, particularly accounts payable
and inventories.
Cash used in investing activities was $5.2 million for the year ended
December 31, 1996. During the fourth quarter of 1996, the Company acquired the
parts distribution division of ProAmerica, Inc., which included the parts
inventory of the division. Cash flows from financing activities reflects the
receipt of net proceeds of $18.5 million from the sale of 1,437,500 shares of
Common Stock to the public in June of 1996. The Company used approximately
$11.4 million of the proceeds from the stock offering to pay off the balance of
the Company's outstanding indebtedness under its bank line of credit.
Capital expenditures, including capital assets acquired through leasing
arrangements, totaled $6.1 million, $5.5 million and $2.4 million in 1996, 1995
and 1994, respectively. Expenditures in the 1996 period were primarily for a
new enhanced high capacity computer-telephony integration system for handling
order processing information systems and warehouse equipment. Capital
expenditures during 1996 also included improvements to the Company's management
information systems, related computer equipment, furniture and fixtures, and
leasehold improvements in the Company's new corporate headquarters and its new
distribution facility. The Company anticipates capital expenditures of
approximately $4 to $5 million in 1997 for improvements and modifications to
the Company information systems and warehouse equipment. The Company believes
these expenditures are required to support and manage future growth of its
business.
The Company believes that its balances of cash and cash equivalents and its
long-term borrowing capability, together with equipment financing related to
capital expenditures for the purchase of equipment, will be sufficient to meet
its 1997 working capital and capital expenditure requirements
EFFECTS OF INFLATION
The Company believes that the effects of inflation on its operations have
not been material during the past three years.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after December 31, 1996. SFAS No. 125 has been amended by SFAS No. 127 which
amends the effective date of certain provisions for those transactions occurring
after December 31, 1997. Management of the Company believes that the impact from
adopting the provisions of SFAS No. 125 will not be material.
In February 1997, the FASB adopted SFAS No. 128, "Earnings Per Share,"
which provides accounting and reporting standards for calculating earnings per
share after December 15, 1997. Management of the Company believes that the
impact from adopting the provisions of SFAS No. 128 will not be material.
14
<PAGE> 16
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
The Company occasionally makes forward-looking statements concerning its
plans, goals, product and service offerings, and anticipated financial
performance. These forward-looking statements may generally be identified by
introductions such as "outlook" for an upcoming period of time, or words and
phrases such as "should", "expect", "hope", "plans", "projected", "believes",
"forward-looking" (or variants of those words and phrases) or similar language
indicating the expression of an opinion or view concerning the future.
These forward-looking statements are subject to risks and uncertainties
based on a number of factors and actual results or events may differ materially
from those anticipated by such forward-looking statements. These factors
include, but are not limited to: the growth rate of the Company's revenue and
market share; the consummation of new and the non-termination of existing OEM
outsourcing arrangements and service provider alliances; the Company's ability
to effectively manage its business functions while growing the Company's
business in a rapidly changing environment; the ability of the Company to adapt
and expand its services in such an environment; the effective and efficient
purchasing of parts and processing of sales orders; and the quality of the
Company's plans and strategies and the ability of the Company to execute such
plans and strategies.
In addition, forward-looking statements concerning the Company's expected
revenue or earnings levels are subject to many additional uncertainties
applicable to competitors generally and to general economic conditions over
which the Company has no control. The Company does not plan to generally
publicly update prior forward-looking statements for unanticipated events or
otherwise and, accordingly, prior forward-looking statements should not be
considered to be "fresh" simply because the Company has not made additional
comments on those forward-looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements together with the report
thereon of KPMG Peat Marwick LLP are included in this report commencing at
Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the heading "Election of Directors" of
the definitive proxy statement for the Company's 1997 Annual Meeting of
Stockholders is incorporated by reference in this Form 10-K Annual Report.
15
<PAGE> 17
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the heading "Executive Compensation" of
the definitive proxy statement for the Company's 1997 Annual Meeting of
Stockholders is incorporated by reference in this Form 10-K Annual Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the heading "Ownership of Common Stock
by Certain Beneficial Owners and Management" of the definitive proxy statement
for the Company's 1997 Annual Meeting of Stockholders is incorporated by
reference in this Form 10-K Annual Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the headings "Election of Directors --
Board Meetings and Committees of the Board;" "Election of Directors --
Compensation of Directors;" and "Certain Transactions" of the definitive proxy
statement for the Company's 1997 Annual Meeting of Stockholders is incorporated
by reference in this Form 10-K Annual Report.
16
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS
The following financial statements of the Company are filed as a part
of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets - December 31, 1996 and 1995 . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations -- For the Three Years
Ended December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity -- For the Three Years
Ended December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows -- For the Three Years
Ended December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
The following consolidated financial statement schedule of the Company
is filed as a part of this report:
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . F-17
</TABLE>
All other financial statement schedules have been omitted because they
are not applicable or the required information is shown in the consolidated
financial statements and notes thereto.
REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by the Company during the last
quarter of fiscal 1996.
17
<PAGE> 19
The following exhibits are filed as a part of this report.
Sequentially
Exhibit
Number Exhibit
------ -------
3.1+++ Restated Certificate of Incorporation of the Company
3.2++ Amended and Restated Bylaws of the Company
4+ Specimen Certificate evidencing Common Stock
10.1++ Financing and Security Agreement between the Company and
NationsBank, Texas, N.A., as amended
10.2++++ Stock Option Plan, including form of Stock Option Agreements,
as amended
10.3++++ Director Compensation Plan
10.4+++++ Employee Stock Purchase Plan
21* Subsidiaries of the Company
23* Consent of KPMG Peat Marwick LLP
27* Financial Data Schedule
_____________
+ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2, Registration Number 33-76068-D, initially filed with the
Securities and Exchange Commission on March 4, 1944, and declared
effective on March 4, 1994, and declared effective on March 28, 1994.
++ Previously filed as an exhibit to the Company's report on Form 10-K for
the year ended December 31, 1994, filed with the Securities and Exchange
Commission on March 31, 1995.
+++ Previously filed as an exhibit to the Company's report on Form S-8,
Registration Number 33-98176, filed with the Securities and Exchange
Commission on October 17, 1995.
++++ Previously filed as an exhibit to the Company's report on Form 10K for
the year ended December 31, 1995, filed with the Securities and Exchange
Commission on March 31, 1966.
+++++ Previously filed as an exhibit to the Company's Registration Statement
on Form S-1, Registration Number 333-03977, initially filed with the
Securities and Exchange Commission on May 17, 1996, and declared
effective on May 28, 1996.
* Filed herewith.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
PC SERVICE SOURCE, INC.
March 29, 1997 By: /s/Mark T. Hilz
----------------------------
Mark T. Hilz, President
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 29, 1997.
SIGNATURE CAPACITY
--------- --------
/s/Mark T. Hilz President, Director
------------------------------- (Principal Executive Officer)
Mark T. Hilz
/s/Avery More Chairman of the Board, Director
-------------------------------
Avery More
/s/ Danny Hair Senior Vice President, Chief Financial
------------------------------- Officer
Danny Hair (Principal Financial Officer)
/s/Bernard Rohde Vice President, Finance
------------------------------- (Principal Accounting Officer)
Bernard Rohde
Director
-------------------------------
Morti Tenenhaus
/s/Philip Wise Director
-------------------------------
Philip Wise
/s/Robert Leff Director
-------------------------------
Robert Leff
/s/Edward Raymund Director
-------------------------------
Edward Raymund
/s/Jay Haft Director
-------------------------------
Jay Haft
19
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
PC Service Source, Inc.:
We have audited the accompanying consolidated balance sheets of PC Service
Source, Inc. and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. In
connection with the audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made my management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PC Service Source,
Inc. and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG PEAT MARWICK LLP
-------------------------------
KPMG Peat Marwick LLP
Dallas, Texas
February 7, 1997
F-1
<PAGE> 22
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Assets 1996 1995
------ -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,650 833
Accounts receivable, less allowance for doubtful accounts of $384
and $267 at December 31, 1996 and 1995, respectively 12,978 10,251
Inventories 19,590 13,202
Income taxes receivable -- 80
Deferred income taxes 866 1,322
Other current assets 763 712
-------- --------
Total current assets 37,847 26,400
-------- --------
Property and equipment:
Computer equipment 8,779 4,633
Furniture and fixtures 4,295 2,766
Leasehold improvements 1,115 828
-------- --------
14,189 8,227
Accumulated depreciation and amortization (3,771) (1,774)
-------- --------
Net property and equipment 10,418 6,453
-------- --------
Other assets, net 1,909 274
-------- --------
$ 50,174 33,127
======== ========
</TABLE>
(Continued)
F-2
<PAGE> 23
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Consolidated Balance Sheets, Continued
December 31, 1996 and 1995
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1996 1995
------------------------------------ -------- --------
<S> <C> <C>
Current liabilities:
Accounts payable $ 7,821 8,876
Accrued liabilities 2,600 1,894
Income taxes payable 38 --
Revolving line of credit 3,053 --
Current installments of obligations under capital leases 841 320
-------- --------
Total current liabilities 14,353 11,090
-------- --------
Long-term debt-revolving line of credit -- 8,934
Obligations under capital leases, excluding current installments 3,059 1,231
Deferred income taxes 566 269
Commitments and contingencies (note 3)
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 5,000,000 shares;
none issued or outstanding -- --
Common stock, $.01 par value. Authorized 20,000,000 shares; issued
5,879,582 and 3,955,371 shares at December 31, 1996 and 1995,
respectively 59 40
Additional paid-in capital 30,946 10,494
Retained earnings 2,981 1,110
Less treasury stock (132,762 and 4,724 shares at December 31, 1996
and 1995, respectively) (1,790) (41)
-------- --------
Total stockholders' equity 32,196 11,603
-------- --------
$ 50,174 33,127
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 24
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net revenues $110,146 68,690 42,267
Cost of revenues 78,001 49,766 30,171
-------- -------- --------
Gross margin 32,145 18,924 12,096
-------- -------- --------
Operating expenses:
Selling, general and administrative 26,457 17,241 8,746
Loss incurred from terminated supply agreement -- 1,935 --
Depreciation and amortization 2,151 1,510 384
-------- -------- --------
28,608 20,686 9,130
-------- -------- --------
Earnings (loss) from operations 3,537 (1,762) 2,966
Net interest expense (income) 577 473 (115)
-------- -------- --------
Earnings (loss) before income taxes 2,960 (2,235) 3,081
Income tax expense (benefit) 1,089 (730) 1,186
-------- -------- --------
Net earnings (loss) $ 1,871 (1,505) 1,895
======== ======== ========
Earnings (loss) per common share $ .35 (.39) .46
======== ======== ========
Weighted average common shares outstanding 5,285 3,900 4,103
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 25
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common stock Additional Total
--------------------- paid-in Retained Treasury stockholders'
Shares Amount capital earnings stock equity
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 890,000 $ 9 1,083 720 -- 1,812
Conversion of long-term debt
to common stock 2,000,000 20 1,480 -- -- 1,500
Issuance of common stock 1,000,000 10 7,857 -- -- 7,867
Exercise of common stock options 3,000 -- 7 -- -- 7
Net earnings -- -- -- 1,895 -- 1,895
--------- --------- --------- --------- --------- ---------
Balances at December 31, 1994 3,893,000 39 10,427 2,615 -- 13,081
Issuance of common stock 1,000 -- 10 -- -- 10
Exercise of common stock options 61,371 1 57 -- (41) 17
Net loss -- -- -- (1,505) -- (1,505)
--------- --------- --------- --------- --------- ---------
Balances at December 31, 1995 3,955,371 40 10,494 1,110 (41) 11,603
Issuance of common stock 1,439,000 14 18,531 -- -- 18,545
Exercise of common stock options 150,129 2 442 -- (267) 177
Exercise of common stock warrants 335,082 3 1,479 -- (1,482) --
Net earnings -- -- -- 1,871 -- 1,871
--------- --------- --------- --------- --------- ---------
Balances at December 31, 1996 5,879,582 $ 59 30,946 2,981 (1,790) 32,196
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 26
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,871 (1,505) 1,895
Adjustments to reconcile net earnings (loss) to
net cash used in operating activities:
Depreciation and amortization 2,151 1,510 384
Deferred income taxes 753 (767) (65)
Loss incurred from terminated supply agreement -- 1,935 --
Other, net (184) (307) --
Changes in operating assets and liabilities:
Accounts receivable (2,727) (5,280) (3,167)
Inventories (5,913) (5,299) (2,540)
Other current assets (38) (472) (126)
Accounts payable (1,055) 5,765 1,079
Accrued liabilities 697 682 593
Income taxes receivable/payable 118 (485) 300
Payable to Intelogic Trace -- (1,200) --
-------- -------- --------
Net cash used in operating activities (4,327) (5,423) (1,647)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (3,244) (4,810) (1,287)
Payments for purchase of acquired assets (1,975) -- (1,425)
-------- -------- --------
Net cash used in investing activities (5,219) (4,810) (2,712)
-------- -------- --------
Cash flows from financing activities:
Net revolving debt borrowings (payments) (5,881) 8,934 (1,610)
Principal payments under capital lease obligations (454) (217) (30)
Net proceeds from public offerings 18,521 -- 7,867
Proceeds from exercise of common stock options 177 17 7
-------- -------- --------
Net cash provided by financing activities 12,363 8,734 6,234
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,817 (1,499) 1,875
Cash and cash equivalents at beginning of year 833 2,332 457
-------- -------- --------
Cash and cash equivalents at end of year $ 3,650 833 2,332
======== ======== ========
Supplemental cash flow disclosures:
Interest paid $ 545 332 29
======== ======== ========
Income taxes paid, net $ 225 508 955
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 27
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(In thousands, except share and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
PC Service Source and Cyclix Engineering Corporation, a majority
owned subsidiary (the Company), is a supplier of parts, used in
the repair of personal computers and associated peripherals, and
services to the personal computing service industry.
The Company began operations in 1989 as Digital Data Corporation
(Digital). In July 1990 the assets of Digital were acquired by a
subsidiary of CompuCom Systems, Inc. (CompuCom), which shortly
thereafter changed Digital's name to PC Parts Express, Inc. From
December 1990 until January 1994, the Company remained a
majority-owned subsidiary of CompuCom. In January 1994, CompuCom
sold a substantial portion of its equity position in the Company
to Rosetta Stone Corporation (Rosetta Stone). Subsequent to the
acquisition by Rosetta Stone, the Company changed its name to PC
Service Source, Inc.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of PC
Service Source, Inc. and its majority owned subsidiary. The
minority interest in the results of operations and net assets of
the subsidiary is not material. All significant intercompany
balances and transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents
The Company considers all highly liquid cash investments with
original maturities of three months or less to be cash
equivalents.
(d) Inventories
Inventories are stated at the lower of average cost or market and
consist primarily of new and remanufactured personal computer
parts.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is
calculated on the straight-line method over the estimated useful
lives of the assets which range from 3 to 5 years. Leasehold
improvements are amortized using the straight-line method over
the lesser of the estimated useful lives of the assets or the
remaining term of the lease.
F-7 (Continued)
<PAGE> 28
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
(f) Other Assets
Other assets consist primarily of goodwill which represents the
excess of purchase price over fair value of net assets acquired
and is amortized on a straight-line basis over the expected
periods to be benefited, generally 15 years (note 1(l)).
(g) Revenue Recognition
Revenue is recognized upon shipment with provisions made for
anticipated returns.
(h) Advertising Costs
Advertising costs are expensed as incurred. Advertising costs
amounted to $1,399, $1,142 and $958 in 1996, 1995 and 1994,
respectively.
(i) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(j) Earnings (loss) per Common Share
Earnings (loss) per common share are calculated based on the
weighted average number of common shares and the dilutive effect
of common equivalent shares, to the extent they are material.
(k) Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and the disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
F-8 (Continued)
<PAGE> 29
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of this Statement did not
have a material impact on the Company's financial position,
results of operations, or liquidity.
(m) Noncash Financing and Investing Activities
Capital lease obligations of $2,866, $723 and $1,083 were
incurred for computer equipment and furniture and fixtures in
1996, 1995 and 1994, respectively.
In 1996, 128,038 shares of treasury stock were acquired upon the
exercise of stock options and warrants. In 1995, 4,724 shares of
treasury stock were acquired upon the exercise of stock options.
In 1996 and 1995, 1,500 and 1,000 shares of common stock,
respectively, were issued to directors in lieu of compensation
for an expense of $24 and $10, respectively.
In 1994, CompuCom converted $1,500,000 of long-term debt into
2,000,000 shares of common stock.
(n) Reclassifications
Certain previously reported financial information has been
reclassified to conform to the 1996 presentation.
(2) REVOLVING LINE OF CREDIT
The Company has a $16 million Revolving Bank Credit Facility (the Credit
Agreement) that matures in December 1997. The amount available under the
facility is limited to specified percentages of qualifying inventories
and accounts receivable. The Company's borrowing base, which is adjusted
weekly, was $15 million at December 31, 1996. The Credit Agreement
contains covenants related to, among others, tangible net worth, debt to
tangible net worth and interest
F-9 (Continued)
<PAGE> 30
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
coverage, and limits the amount available for capital expenditures and
dividends. Outstanding borrowings under the agreement are collateralized
by substantially all of the assets of the Company. The carrying value of
the amounts outstanding approximates the estimated fair value since the
obligation bears interest at current market rates.
Interest is payable on the outstanding borrowings at a rate of 1% above
the prime rate (8.25% at December 31, 1996) and on the unused borrowings
at a rate of .5%. The weighted average interest rate for the year ended
December 31, 1996 was 9.29%.
(3) LEASES
During 1996 and 1995, the Company entered into capital leases for
computer and warehouse equipment and furniture and fixtures expiring in
various years through 2001. Depreciation and amortization of assets
under capital leases is included in depreciation and amortization
expense for the years ended December 31, 1996 and 1995. Interest rates
on capitalized leases vary from 6.06% to 10.69% and are imputed based on
the lower of the Company's incremental borrowing rate at the inception
of each lease or the lessor's implicit rate. Property held under capital
leases at December 31, 1996 and 1995 is presented below.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Computer equipment $ 2,303 832
Furniture and fixtures 2,019 976
Leasehold improvements 352 --
-------- --------
4,674 1,808
Less accumulated depreciation and amortization 974 331
-------- --------
$ 3,700 1,477
======== ========
</TABLE>
The Company leases office and warehouse distribution space and equipment
under various noncancellable operating leases with terms from three to
ten years. Certain of the leases contain renewal options ranging up to
five years. Total rental expense under operating leases was $1,665, $856
and $222 in 1996, 1995 and 1994, respectively.
F-10 (Continued)
<PAGE> 31
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
The present value of future minimum lease payments under capital leases
and the minimum lease payments under noncancelable operating leases are
presented below.
<TABLE>
<CAPTION>
Capital Operating
leases leases
------ ------
<S> <C> <C> <C>
1997 $ 1,165 1,835
1998 1,165 1,808
1999 1,126 1,789
2000 859 1,788
2001 407 1,788
Thereafter - 6,372
------- -------
Total minimum lease payments 4,722 $15,380
=======
Less amount representing interest 822
-------
Present value of net minimum lease payment 3,900
Less current installments of obligations under capital leases 841
-------
Obligations under capital leases, excluding current installments $ 3,059
=======
</TABLE>
(4) INCOME TAXES
Income tax expense (benefit) for the year ended December 31 is presented
below.
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Federal:
Current $ 272 -- 1,074
Deferred 777 (767) (65)
State:
Current 64 37 177
Deferred (24) -- --
-------- -------- --------
$ 1,089 (730) 1,186
======== ======== ========
</TABLE>
The reconciliation of income taxes at the federal statutory rate of
34% to the provision for income taxes (benefit) for the year ended
December 31 is presented below.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Income taxes at federal statutory rate 34.0% (34.0) 34.0
State taxes, net of federal income tax benefit 2.7 1.1 3.8
Other .1 .2 .7
-------- -------- --------
Effective rate 36.8% (32.7) 38.5
======== ======== ========
</TABLE>
F-11 (Continued)
<PAGE> 32
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at
December 31 are presented below.
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ -- 696
Inventory costs 432 283
Accrued expenses 200 182
Accounts receivable 142 91
Other 92 70
------- -------
Total deferred tax asset 866 1,322
Deferred tax liability - depreciation 566 269
------- -------
Net deferred tax asset $ 300 1,053
======= =======
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion of the
deferred tax assets will not be realized. The Company expects the
deferred tax assets at December 31, 1996 and 1995 will be realized as a
result of the reversal during the carryforward period of existing
taxable temporary differences giving rise to deferred tax liabilities
and generation of future taxable income. No valuation allowance is
considered necessary as of December 31, 1996 and 1995.
(5) STOCKHOLDERS' EQUITY
In April 1994, the Company issued 1,000,000 shares of common stock to
the public. The net proceeds of this initial public offering were
$7,867. The net proceeds were used to pay approximately $2,200 which was
outstanding under the Company's revolving bank credit facility. The
balance of the net proceeds was added to the Company's working capital
for general operating purposes.
In June 1996, the Company issued 1,437,500 shares of common stock to the
public. The net proceeds of this secondary public offering were $18,521.
The net proceeds were used to pay approximately $11,400 which was
outstanding under the Company's revolving bank credit facility. The
balance of the net proceeds was added to the Company's working capital
for general operating purposes.
(6) STOCK OPTIONS
In 1992, the Company adopted a stock option plan (the Plan) pursuant to
which the Company's Board of Directors may grant incentive and
nonqualified options to officers and key employees. The Plan authorizes
grants of options to purchase up to 1,000,000 shares of authorized but
unissued common stock. Stock options are granted with an exercise price
equal to the stock's fair
F-12 (Continued)
<PAGE> 33
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
market value at the date of grant. Stock options generally become
exercisable and vest at a rate of 20% per year for five years after
the date of grant and generally carry an expiration date of ten years
subsequent to the date of issuance. At December 31, 1996, there were
155,000 additional shares available for grant under the Plan.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, Accounting for Stock-Based
Compensation, the Company's net earnings (loss) would be reduced
(increased) to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Net earnings (loss):
As reported $ 1,871 (1,505)
Pro forma 1,643 (1,577)
Earnings (loss) per common share:
As report .35 (.39)
Pro forma .31 (.40)
</TABLE>
Pro forma net earnings (loss) reflects only options granted in 1996 and
1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
earnings (loss) amounts presented above because compensation cost is
reflected over the options' vesting period of five years and
compensation cost for options granted prior to January 1, 1995 is not
considered.
The per share weighted-average fair value of stock options granted
during 1996 and 1995 ranged from $4.96 - $8.20 and $4.97 - $5.27,
respectively, on the date of grant using the Black Scholes option-
pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Expected dividend yield 0% 0%
Expected volatility 58.4% 58.4%
Risk-free interest rate 5.24 - 6.64% 5.34 - 7.53%
Expected life 5 years 5 years
</TABLE>
F-13 (Continued)
<PAGE> 34
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Following is a summary of activity in the Plan 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------- -------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------- -------- -------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 624,129 $ 5.46 614,500 $ 4.56 300,000 $ 1.58
Granted 212,000 11.84 170,000 9.04 317,500 7.35
Exercised (150,129) 2.96 (61,371) 2.25 (3,000) 2.25
Canceled (55,500) 10.57 (99,000) 8.83 - -
-------- -------- -------- ------ --------- ------
Outstanding at end of year 630,500 $ 7.75 624,129 $ 5.46 614,500 $ 4.56
======== ======== ======== ====== ======== ======
Options exercisable at
year end 224,500 192,000 132,500
======== ======== ========
Weighted average fair
value of options
granted during the year $ 6.68 $ 5.11
======== ========
</TABLE>
(7) STOCK WARRANTS
In January 1994, the Company issued CompuCom a warrant to purchase
250,000 shares of common stock as part of the transaction in which
CompuCom sold a portion of the common stock it owned to Rosetta Stone.
The warrant was amended in May 1996 to include a net exercise provision
which permits the holder to surrender the warrant in exchange for the
number of shares of stock equal to the difference between the total
number of shares under the warrant and the number of shares at fair
market value equal to the total exercise price. The warrant was
surrendered and exercised under this provision in June 1996 resulting in
the issuance of 209,821 shares at an exercise price of $2.25 per share.
In connection with the Company's initial public offering in 1994, the
Company sold warrants covering 100,000 shares of common stock to the
representatives of the underwriters for a purchase price of $.01 per
share. The exercise price of these warrants is equal to 120% of the
initial public offering price per share of common stock and the warrant
also contains a net exercise provision. The warrants may be exercised
for all or any lesser number of shares of the common stock covered by
the warrants between April 6, 1995 and April 6, 2000. During 1996, a
portion of the warrant was exercised for 85,082 shares pursuant to the
net exercise provision at a price of $10.80 per share.
F-14 (Continued)
<PAGE> 35
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
(8) RELATED PARTY TRANSACTIONS
The Company's sales to CompuCom were $783, $735 and $1,409 in 1996, 1995
and 1994, respectively. In addition, purchases of computer parts and
equipment from CompuCom were $496, $5,108 and $1,133 in 1996, 1995 and
1994, respectively. At December 31, 1996 and 1995, the Company had
accounts receivable outstanding from CompuCom of approximately $168 and
$94, respectively. Selling, general and administrative expenses included
charges from CompuCom for certain insurance and employee benefits of
$361 in 1994. Following the secondary offering in June 1996, CompuCom
owned less than 5% of the Company's common stock.
During 1994, the Company had a consulting agreement with Rosetta Stone
that was terminable at will by either party and pursuant to which the
Company paid Rosetta Stone $15 per month for management advice,
consulting services and strategic planning advice. The consulting
agreement was terminated on December 31, 1994.
In 1994, CompuCom agreed to allow the Company's employees to continue to
participate in CompuCom's group health benefit plans through December
31, 1994 in exchange for a payment of a specified amount per employee.
The agreement with CompuCom provided for an adjustment between CompuCom
and the Company based on the actual loss experience as compared to the
total amount paid to CompuCom on behalf of the Company's employees. At
December 31, 1995, the Company had a receivable from CompuCom of $108
representing amounts paid in excess of actual loss experience. No
receivable existed at December 31, 1996.
(9) BENEFIT PLANS
The Company sponsors a defined contribution plan under Section 401(k) of
the Internal Revenue Code. Employees who have attained the age of 21 and
completed one year of service are eligible to participate. Eligible
employees may contribute from 1% to 15% of the annual compensation
subject to limitations. The Company matches 100% of the first 4% an
employee contributes. Employee contributions vest immediately while the
Company contributions become vested beginning in the participant's first
year of eligibility with full vesting by the end of the second year. In
1996, 1995 and 1994 the Company contributed $299, $206 and $105,
respectively.
In 1996, the Company adopted an Employee Stock Purchase Plan (the
Purchase Plan) covering all employees that have attained the age of 21
and completed one year of service. Under the Purchase Plan, eligible
participants may purchase stock of the Company at not less than 85% of
its market value as of the date the option to purchase is offered to the
employees; employees have one year to make sufficient contributions to
pay the exercise price. No shares have been issued under the Purchase
Plan. As of December 31, 1996, 100,000 shares were available for future
issuance.
F-15 (Continued)
<PAGE> 36
PC SERVICE SOURCE, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
(10) TRANSACTION WITH INTELOGIC TRACE, INC.
In November 1994, the Company entered into a supply agreement with
Intelogic Trace (Intelogic) to provide substantially all of the spare
parts and replacement parts required by Intelogic's service operations.
The Company also acquired a component level returned parts repair
facility in San Antonio, Texas (San Antonio Facility), certain parts
inventory, and repair equipment. Intelogic filed for bankruptcy in March
1995, its business was sold in April 1995 and, as a result, the supply
agreement with the Company was terminated. The Company closed the San
Antonio Facility and terminated the employment of approximately
forty-five employees at that facility as a result of the bankruptcy
filing.
The Company realized a pretax charge in 1995 of $1,935, of which $907
was for uncollected accounts receivable in excess of the approximately
$900 recovered by the Company from its escrow security account with
Intelogic and $931 related to the write-off of certain fixed assets
formerly used at the San Antonio Facility. The remaining $97 of the
pretax charge was for severance packages paid to the approximately
forty-five terminated employees.
(11) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
1996 quarter quarter quarter quarter
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues $ 26,281 26,786 28,478 28,601
Gross margin 7,573 8,316 7,988 8,268
Net earnings (loss) 654 759 179 279
Earnings (loss) per common
share .15 .16 .03 .05
1995
Net revenues $ 16,782 15,274 16,301 20,333
Gross margin 4,626 4,172 4,306 5,820
Net earnings (loss) 564 (434) (1,667) 32
Earnings (loss) per
common share .13 (.11) (.43) .01
</TABLE>
F-16
<PAGE> 37
SCHEDULE II
PC SERVICE SOURCE, INC.
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
beginning of costs and other end
Description period expenses accounts Deductions of period
----------- ------ -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Accounts receivable -
allowance for doubtful
accounts:
1996 $ 267 505 -- 388 384
1995 275 1,197 (A) -- 1,205 (A) 267
1994 219 210 -- 154 275
</TABLE>
(A) Includes charge and write-off of $907 of account receivable for Intelogic
Trace.
F-17
<PAGE> 38
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit
Number Exhibit
- ------ -------
<S> <C>
3.1+++ Restated Certificate of Incorporation of the Company
3.2++ Amended and Restated Bylaws of the Company
4+ Specimen Certificate evidencing Common Stock
10.1++ Financing and Security Agreement between the Company and
NationsBank, Texas, N.A., as amended
10.2++++ Stock Option Plan, including form of Stock Option Agreements, as
amended
10.3++++ Director Compensation Plan
10.4+++++ Employee Stock Purchase Plan
21* Subsidiaries of the Company
23* Consent of KPMG Peat Marwick LLP
27* Financial Data Schedule
</TABLE>
- --------------------
+ Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2, Registration Number 33- 76068-D, initially filed with
the Securities and Exchange Commission on March 4, 1994, and declared
effective on March 4, 1994, and declared effective on March 28, 1994.
++ Previously filed as an exhibit to the Company's report on Form 10-K
for the year ended December 31, 1994, filed with the Securities and
Exchange Commission on March 31, 1995.
+++ Previously filed as an exhibit to the Company's report on Form S-8,
Registration Number 33-98176, filed with the Securities and Exchange
Commission on October 17, 1995.
++++ Previously filed as an exhibit to the Company's report on Form 10-K for
the year ended December 31, 1995, filed with the Securities and
Exchange Commission on March 31, 1996.
+++++ Previously filed as an exhibit to the Company's Registration Statement
on Form S-1, Registration Number 333- 03977, initially filed with the
Securities and Exchange Commission on May 17, 1996, and declared
effective on May 28, 1996.
* Filed herewith.
E-1
<PAGE> 1
PC SERVICE SOURCE, INC.
EXHIBIT 21 - SUBSIDIARIES OF THE COMPANY
Cyclix Engineering Corporation
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
PC Service Source, Inc.:
We consent to incorporation by reference in the registration statements on Form
S-8 (No. 333-09333, No. 333-09335, No. 33-81146 and No. 33-98176) of PC Service
Source, Inc. of our report dated February 7, 1997, relating to the
consolidated balance sheets of PC Service Source, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996, and related schedule, which report
appears in the December 31, 1996 Form 10-K of PC Service Source, Inc.
KPMG Peat Marwick LLP
Dallas, Texas
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,650
<SECURITIES> 0
<RECEIVABLES> 13,362
<ALLOWANCES> (384)
<INVENTORY> 19,590
<CURRENT-ASSETS> 37,847
<PP&E> 14,189
<DEPRECIATION> (3,771)
<TOTAL-ASSETS> 50,174
<CURRENT-LIABILITIES> 14,353
<BONDS> 3,059
59
0
<COMMON> 0
<OTHER-SE> 32,137
<TOTAL-LIABILITY-AND-EQUITY> 50,174
<SALES> 104,900
<TOTAL-REVENUES> 110,146
<CGS> 73,956
<TOTAL-COSTS> 78,001
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 577
<INCOME-PRETAX> 2,960
<INCOME-TAX> 1,089
<INCOME-CONTINUING> 1,871
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,871
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
<FN>
<F1>PROVISION FOR DOUBTFUL ACCOUNTS AND INVENTORY PROVISION INCLUDED IN TOTAL
COSTS.
</FN>
</TABLE>
